Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes pa

1. 0 Current Liabilities and Payroll After studying this chapter, you should be able to: • Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable. • Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings. • Describe the payroll accounting systems that use a payroll register, employee earnings records, and a general journal. • Describe the accounting treatment for contingent liabilities and journalize entries for product warranties.

2. Objective 1 11-1 Describe and illustrate current liabilities related to accounts payable, current portion of long-term debt, and notes payable. 0 Liabilities that are to be paid out of current assets and are due within a short time, usually within one year, are called current liabilities. • Accounts payable • Current portion of long-term debt • Notes payable

3. 0 Accounts payable arise from purchasing goods or services for use in a company’s operations or for purchasing merchandise for resale. 11-1 Long-term liabilities are often paid back in periodic payments, called installments. Installmentsthat are due within the coming year must be classified as a current liability. The total amount of the installments due after the coming year is classified as a long-term liability.

4. 0 11-1 Short-Term Notes Payable A firm issues a 90-day, 12% note for $1,000, dated August 1, 2008 to Murray Co. for a $1,000 overdue account. Aug. 1 Accounts Payable—Murray Co. 1 000 00 Notes Payable 1 000 00 Issued a 90-day, 12% note on account.

5. Oct. 30 Notes Payable 1 000 00 Interest Expense 30 00 Cash 1 030 00 Paid principal and interest on note. 0 11-1 On October 30, when the note matures, the firm pays the $1,000 principal plus $30 interest ($1,000 x 12% x 90/360).

6. 0 11-1 On May 1, Bowden Co. (borrower) purchased merchandise on account from Coker Co. (creditor), $10,000, 2/10, n/30. The merchandise cost Coker Co. $7,500.

7. Bowden Co. (Borrower) Description Debit Credit Coker Co. (Creditor) Description Debit Credit Accounts Receivable 10,000 Sales 10,000 Cost of Mdse. Sold 7,500 Mdse. Inventory 7,500 0 11-1 Mdse. Inventory 10,000 Accounts Payable 10,000

8. Bowden Co. (Borrower) Description Debit Credit Accounts Payable 10,000 Notes Payable 10,000 Coker Co. (Creditor) Description Debit Credit Notes Receivable 10,000 Accounts Receivable 10,000 0 11-1 On May 3, Bowden Co. issued a 60-day, 12% note for $10,000 to Coker Co. on account.

9. Bowden Co. (Borrower) Description Debit Credit Notes Payable 10,000 Interest Expense 200 Cash 10,200 Coker Co. (Creditor) Description Debit Credit Cash 10,200 Interest Revenue 200 Notes Receivable 10,000 0 11-1 On July 30, Bowden Co. paid Coker Co. the amount due on the note of May 31. Interest: $10,000 x 12% x 60/360.

10. 0 11-1 On September 19, a firm borrows $4,000 from First National Bank by giving the bank a 90-day, 15% note. Sept. 19 Cash 4 000 00 Notes Payable 4 000 00 Issued a 90-day, 15% note to the bank.

11. 0 11-1 On the due date of the note (December 18), the borrower owes $4,000 plus interest of $150 ($4,000 x 15% x 90/360). Dec. 18 Notes Payable 4 000 00 Interest Expense 150 00 Cash 4 150 00 Paid principal and interest due on note.

12. Objective 2 11-2 Determine employer liabilities for payroll, including liabilities arising from employee earnings and deductions from earnings. 0 11-2 Payroll refers to the amount paid to employees for the services they provide during a period. It is usually significant for several reasons. • Employees are sensitive to payroll errors and irregularities. • The payroll is subject to various federal and state regulations. • The payroll and related payroll taxes have a significant effect on the net income of most businesses.

13. 0 Wages usually refers to payment for manual labor, both skilled and unskilled. The rate of wages is normally stated on an hourly or weekly basis. 11-2 Salary usually refers to payment for managerial, administrative, or similar services, normally expressed in terms of a month or a year. The total earnings of an employee for a payroll period are called gross pay. From this is subtracted one or more deductions to arrive at the net pay. Net pay is the amount that the employer must pay the employee.

14. 0 11-2 McGrath Illustration John T. McGrath is employed by McDermott Supply Co. at the rate of $34 per hour, plus 1.5 times the normal hourly rate for hours over 40 per week. For the week ended December 27, McGrath worked 42 hours. Earnings at base rate (40 x $34) $1,360 Earnings at overtime rate (2 x $51) 102 Total earnings $1,462

15. 0 11-2 McGrath made $1,462 for the week ending December 27. Since McGrath’s W-4 claims one withholding allowance, $67 (the assumed standard withholding allowance) is deducted from his gross pay to arrive at $1,395 ($1,462 – $67). *The actual IRS standard withholding allowance changes every year.

16. Exhibit 3 Wage Bracket Withholding Table 2 Table for Percentage Method of Withholding WEEKLY Payroll Period Source: Publication 15, Employer’s Tax Guide, Internal Revenue Service, 2008

17. 2 McGrath Example (continued) Initial withholding $ 82.95 Plus [25% × ($1,395 – $653)] 185.50 Total federal income taxes withheld $268.45

18. Example Exercise 11-2 0 11-2 Karen Dunn’s weekly gross earnings for the present week were $2,250. Dunn has two exemptions. Using the wage bracket withholding table in Exhibit 3 (Slide 16) with a $67 standard withholding allowance for each exemption, what is Dunn’s federal income tax withholding?

19. Follow My Example 11-2 For Practice: PE 11-2A, PE 11-2B 2 Example Exercise 11-2 (continued) Total wage payment $2,250 One allowance (provided by IRS) $67 Multiplied by allowances claimed on W-4 × 2 134 Amount subject to withholding $2,116 Initial withholding from wage bracket in Exh. 3 $302.96 Plus additional withholding: 28% of excess over $1,533 163.24* Federal income tax withholding $466.20 *28% × ($2,116 – $1,533)

20. 0 11-2 FICA Tax The amount of FICA tax withheld is the employees’ contribution to two federal programs. The first program, called social security, is for old age, survivors, and disability insurance (OASDI). The second program, called Medicare, is health insurance for senior citizens.

21. 2 John T. McGrath’s FICA Tax John T. Mcgrath’s annual earnings prior to the payroll period ending on December 27 total $99,038. Earnings subject to 6% social security tax ($100,000 – $99,038) $ 962 Social security tax rate × 6% Social security tax $57.72 Earnings subject to 1.5% Medicare tax $1,462 Medicare tax rate × 1.5% Medicare tax 21.93 Total FICA tax $79.65

22. 2 John T. McGrath’s Net Pay Gross earnings for the week $1,462.00 Deductions: Social security tax (Slide 21) $ 57.72 Medicare tax (Slide 21) 21.93 Federal income tax (Slide 17) 268.45 Retirement savings 20.00 United Way 5.00 Total deductions 373.10 Net pay $1,088.90

23. 2 Example Exercise 11-3 Employee Net Pay Karen Dunn’s weekly gross earnings for the week ending Dec. 3rd were $2,250, and her federal income tax withholding was $466.19. Prior to this week Dunn had earned $98,000 for the year. Assuming the social security rate is 6% on the first $100,000 of annual earnings and Medicare is 1.5% of all earnings, what is Dunn’s net pay?

24. For Practice: PE 11-3A, PE 11-3B Follow My Example 11-3 2 Example Exercise 11-3 (continued) Total wage payment $2,250.00 Less: Federal income tax withholding 466.19 Earnings subject to social security tax ($100,000 – $98,000) $2,000 Social security tax rate × 6% Social security tax 120.00 Medicare tax ($2,250 × 1.5%) 33.75 Net pay $1,630.06

25. 0 Employer’s Federal Payroll Taxes 11-2 11-2 Employers are required to contribute to the social security and Medicare programs for each employee. The employer must match the employee’s contribution to each program.

26. 0 A Federal Unemployment Tax of 6.2% is levied on employersonlyto provide for temporary unemployment to those who become unemployed as a result of layoffs due to economic causes beyond their control. This tax applies to only the first $7,000 of the earnings of each covered employee during a calendar year. 11-2 11-2 Employers in most states also must pay a state unemployment tax for unemployed workers. A few states require employee contributions. The state plan is designed to reward firms with stable employment, so the tax rate varies from state to state and employer to employer.

27. 0 Objective 3 11-3 The payroll register is a multicolumn report used for summarizing the data for each payroll period. The last two columns of the payroll register are used to accumulate the total wages or salaries to be debited to various expense accounts. The process is usually called payroll distribution. Describe payroll accounting systems that use a payroll register, employee earnings records, and a general journal.

28. Exhibit 5 3 Payroll Register (left side)

29. Exhibit 5 3 3 Payroll Register (right side)

30. 0 11-3 Recording Employees’ Earnings Dec. 27 Sales Salaries Expense 11 122 00 Office Salaries Expense 2 780 00 Social Security Tax Payable 643 07 Medicare Tax Payable 208 53 Employees’ Federal Inc. Tax Pay. 3 332 00 Retirement Savings Ded. Payable 680 00 United Way Deductions Payable 470 00 Accounts Receivable—Fred Elrod 50 00 Salaries Payable 8 518 40 Payroll for week ended December 27.

31. Example Exercise 11-4 0 11-3 The payroll register of Chen Engineering Services indicates $900 of social security withheld and $225 of Medicare tax withheld on total salaries of $15,000 for the period. Federal withholding for the period totaled $2,925. Provide the journal entry for the period’s payroll.

32. Follow My Example 11-4 0 11-3 Salaries Expense 15,000 Social Security Tax Payable 900 Medicare Tax Payable 225 Federal Withholding Tax Payable 2,925 Salaries Payable 10,950 For Practice: PE 11-4A, PE 11-4B

33. 0 11-3 Recording and Paying Payroll Taxes Assume that in Exhibit 5 the earnings subject to state and federal unemployment compensation taxes are $2,710. In addition, assume a SUTA rate of 5.4% and a FUTA rate of 0.8%. What is the rate for each of the following?

34. 0 11-3 Data for McDermott Supply Co. payroll for the week ending December 27: Social security tax $ 643.07 Medicare tax 208.53 State unemployment compensation tax (5.4% x $2,710) 146.34 Federal unemployment compensation tax (0.8% x $2,710) 21.68 Total payroll tax expense $1,019.62

35. 0 11-3 McDermott Supply Co.’s payroll entry on December 27 is recorded as follows: Dec. 27 Payroll Tax Expense 1 019 62 Social Security Tax Payable 643 07 Medicare Tax Payable 208 53 State Unemployment Tax Payable 146 34 Federal Unemployment Tax Pay. 21 68 Payroll taxes for week ended December 27.

36. 3 Example Exercise 11-5 Journalize Payroll Taxes The payroll register of Chen Engineering Services indicates $900 of social security withheld and $225 of Medicare tax withheld on total salaries of $15,000 for the period. Assume earnings subject to state and federal unemployment compensation taxes are $5,250, at the federal rate of 0.8% and state tax of 5.4%. Provide the journal entry to record the payroll tax expense for the period.

37. For Practice: PE 11-5A, PE11-5B Follow My Example 11-5 3 Example Exercise 11-5 (continued) Payroll Tax Expense………………………….. 1,450.50 Social Security Tax Payable……………. 900.00 Medicare Tax Payable…………………… 225.00 State Unemployment Tax Payable ($5,250 × 5.4%)………………………….. 283.50 Federal Unemployment Tax Payable ($5,250 × 0.8%)………………………….. 42.00

38. 0 11-3 A detailed payroll record is maintained for each employee. This record is called an employee’s earnings record. At the end of each pay period, payroll checksare prepared. Each check includes a detachable statement showing the details of how the net pay was computed.

39. Employee’s Earnings Record 0 11-3 (Continued)

40. (Coluded) 0 11-3 (Concluded)

41. Payroll Check 0 11-3

42. 0 Objective 5 11-5 Describe the accounting treatment for contingent liabilities and journalize entries for product warranties. Some past transactions will result in liabilities if certain events occur in the future. These potential obligations are called contingent liabilities.

43. 0 11-5 Contingent Liabilities During June, a company sells a product for $60,000 on which there is a 36-month warranty. Past experience indicates that the average cost to repair defects is 5% of the sales price over the warranty price. June 30 Product Warranty Expense 3 000 00 Product Warranty Payable 3 000 00 Warranty expenses projected for June, 5% of $60,000.

44. 0 11-5 If a customer required a $200 part replacement on August 16, the entry would be: Aug. 16 Product Warranty Payable 200 00 Supplies 200 00 Replaced defective part under warranty.

45. Quick Ratio = Quick assets Current liabilities 0 11-5 Quick Ratio Noble Co. Hart Co. Quick assets: Cash $147,000 $120,000 Accounts receivable (net) 84,000 472,000 Total $231,000 $592,000 Current liabilities $220,000 $740,000 The quick ratio or acid-test ratio can be used to evaluate a firm’s ability to pay its current liabilities within a short period of time.

46. Quick Ratio = Quick assets Current liabilities $231,000 $220,000 = 1.05 Noble Company = 0 11-5 Quick Ratio Noble Co. Hart Co. Quick assets: Cash $147,000 $120,000 Accounts receivable (net) 84,000 472,000 Total $231,000 $592,000 Current liabilities $220,000 $740,000

47. Quick Ratio = Quick assets Current liabilities $592,000 $740,000 = 0.80 Hart Company = 0 11-5 Noble Co. Hart Co. Quick assets: Cash $147,000 $120,000 Accounts receivable (net) 84,000 472,000 Total $231,000 $592,000 Current liabilities $220,000 $740,000

48. 0 11-5 Interpretation Noble Company is in a better quick ratio position than Hart Company. By having a quick ratio in excess of 1, Noble Company has quick assets sufficient to cover the company’s current liabilities. This is not true for Hart Company.